4 Ways Graduate Student Loans Differ From College Debt

Kelsey Sheehy

Graduate students have a leg up on the financial aid process.

Most are no longer student loan novices. They have perfected the art of filling out the Free Application for Federal Student Aid, know what terms like Expected Family Contribution mean and can recite the differences between subsidized and unsubsidized Stafford loans.

While the process and the terms may be familiar, student loans for graduate students come with their own quirks and nuances. Below are four key differences between federal financial aid for grad students and undergrads.

[Explore the Best Graduate Schools rankings.]

1. FAFSA: Put the phone down -- you don't need to call your parents. Graduate students do not need to enter mom and dad's financial information on the FAFSA.

This was an unexpected surprise for Patrick O'Keefe, a 23-year-old master's candidate in mass communications at the University of Florida, who says applying for federal aid was much easier as a grad student.

"I was automatically declared independent for my graduate school FAFSA, which means all I had to do was submit my personal tax return," says O'Keefe. "I was instantly given my EFC and loan eligibility amount after completing it, which made it much easier to plan."

2. Available aid: Low-income students who qualified for need-based Pell Grants as undergrads will be disappointed to learn those funds are not available at the graduate level. Those students may need to take on debt to pursue a master's or professional degree.

"On the graduate side there tends to be less subsidy," says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators. "You're just going to see larger amounts of loans, and potentially some work-study."

Federal loans available to grad students include unsubsidized Stafford and Graduate PLUS loans. Some students may qualify for a Perkins loan, depending on their financial need, but those funds are scarce.

Students need to pass a credit check to take out a PLUS loan, and those with a bankruptcy, foreclosure or an account in collections may be denied.

[Learn more about how bankruptcy affects grad school financing.]

3. Interest rates: "There's sort of good news, bad news for graduate students on interest rates," Draeger says.

The good news: Interest rates on student loans are now tied to the 10-year treasury note, so students will no longer pay above market rate on student loan interest.

The bad news: Graduate students still pay a higher interest rate than undergraduates, and those rates could increase as the market changes.

Grad students are not eligible for subsidized loans, so those higher interest rates start accruing on day one, Draeger says.

Students who took out loans while earning their bachelor's also need to consider the interest rates on those loans, says Cathy Mueller, executive director of Mapping Your Future, a nonprofit that helps students plan for college and manage their finances.

While students can postpone loan payments if they return to school, interest will still accumulate, she says.

"If they're going to be putting those loans on in-school deferment, those loans are going to continue to grow because of the interest," she says. "One of the things they can do to minimize the impact is pay the interest, if they can afford to do that."

[Consider five smart strategies to pay for grad school.]

4. Borrowing limits: Undergraduate Stafford loans are capped at $5,500 the first year, $6,500 the second year and $7,500 for any remaining years, up to a maximum of $31,000. Graduate students, though, can borrow a lot more.

Most grad students can take out $20,500 a year in Stafford loans and cannot exceed $138,500 between undergrad and grad school. For students in certain health fields, those limits are raised to $47,167 annually, with a lifetime cap of $224,000.

That's a lot of debt, even for someone entering a lucrative profession, Mueller says.

"It can become a burden for students to pay that amount of money back," she says. "No matter whether you're in a high-paying career field or not, it can stifle other options for you."

Graduate PLUS loans allow students to get into deeper trouble. Students can cover their entire out-of-pocket costs each year -- including tuition, books and living expenses -- using a PLUS loan. But that doesn't mean they should, says Draeger, with NASFAA.

"The student should really be evaluating what their budget is and how much they really need to take," he says. "Ultimately, that all has to be paid back with interest."

Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.